SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED MARCH 31, 1998 COMMISSION FILE NO. 1-12504
THE MACERICH COMPANY
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(Exact name of registrant as specified in its charter)
MARYLAND 95-4448705
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
401 Wilshire Boulevard, Suite 700, Santa Monica, CA 90401
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(Address of principal executive office)(Zip code)
Registrant's telephone number, including area code (310) 394-6911
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N/A
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(Former name, former address and former fiscal year,
if changed since last report)
Number of shares outstanding of each of the registrant's classes of common
stock, as of May 7, 1998.
Common stock, par value $.01 per share: 30,584,469
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or such shorter period that the Registrant was
required to file such report) and (2) has been subject to such filing
requirements for the past ninety (90) days.
YES X NO
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Form 10-Q
INDEX
Page
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Part I: Financial Information
Item 1. Financial Statements
Consolidated balance sheets of The Company as of March 31, 1998 and
December 31, 1997 .......................................................... 1
Consolidated statements of operations of The Company for the periods
from January 1 through March 31, 1998 and 1997 ............................. 2
Consolidated statements of cash flows of The Company for the periods
from January 1 through March 31, 1998 and 1997 ............................. 3
Notes to condensed and consolidated financial statements ................... 4 to 13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................................... 14 to 19
Part II: Other Information ........................................................... 20
THE MACERICH COMPANY (The Company)
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, December 31,
1998 1997
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ASSETS:
Property, net ................................................................. $ 1,407,686 $ 1,407,179
Cash and cash equivalents ..................................................... 18,726 25,154
Tenant receivables, net, including accrued overage rents of
$2,892 in 1998 and $4,330 in 1997 ........................................ 23,826 23,696
Due from affiliates ........................................................... -- 3,105
Deferred charges and other assets, net ........................................ 38,567 37,899
Investment in joint ventures and the Management Companies...................... 249,224 7,969
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Total assets ................................................... $ 1,738,029 $ 1,505,002
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LIABILITIES AND STOCKHOLDERS' EQUITY:
Mortgage notes payable:
Related parties .......................................................... $ 135,126 $ 135,313
Others ................................................................... 770,356 771,246
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Total .................................................................... 905,482 906,559
Bank notes payable ............................................................ 133,000 55,000
Convertible debentures ........................................................ 161,400 161,400
Accounts payable .............................................................. 2,298 5,185
Accrued interest expense ...................................................... 8,489 4,878
Accrued real estate taxes and ground rent expense ............................. 7,886 7,272
Due to affiliates ............................................................. 326 15,109
Deferred acquisition liability ................................................ 5,000 5,000
Other accrued liabilities ..................................................... 29,647 27,841
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Total liabilities .............................................. 1,253,528 1,188,244
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Minority interest in Operating Partnership .................................... 131,542 100,463
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Commitments and contingencies (Note 10)
Stockholders' equity:
Series A convertible preferred stock, 10,000,000 shares authorized,
3,627,100 and 0 shares issued and outstanding at March
31, 1998 and December 31, 1997, respectively ..................... 100,000 --
Common stock, $.01 par value, 100,000,000 shares authorized, 28,808,000
and 26,004,800 shares issued and outstanding at March 31, 1998 and
December 31, 1997, respectively .................................. 288 260
Additional paid in capital ............................................... 257,769 219,121
Accumulated earnings ..................................................... -- --
Unamortized restricted stock ............................................. (5,098) (3,086)
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Total stockholders' equity ...................................... 352,959 216,295
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Total liabilities and stockholders' equity ...................... $ 1,738,029 $ 1,505,002
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The accompanying notes are an integral part of these financial statements.
THE MACERICH COMPANY (The Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
January 1 to March 31,
----------------------------
1998 1997
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REVENUES:
Minimum rents .................................... $ 39,416 $ 32,053
Percentage rents ................................. 3,170 2,206
Tenant recoveries ................................ 17,641 14,917
Other ............................................ 948 1,126
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Total Revenues ............................... 61,175 50,302
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OPERATING COSTS:
Shopping center expenses ......................... 18,722 15,761
General and administrative expense ............... 1,024 750
Interest expense:
Related parties .............................. 2,527 2,490
Others ....................................... 18,049 12,276
Depreciation and amortization .................... 11,712 9,474
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Total Expenses .............................. 52,034 40,751
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Equity in income of unconsolidated
joint ventures and the management companies ...... 1,428 368
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Income before extraordinary item and minority
interest ......................................... 10,569 9,919
Less extraordinary loss on early extinguishment of debt 90 --
Less minority interest in net income
of the Operating Partnership ..................... 3,008 3,168
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Net income ............................................ 7,471 6,751
Less preferred dividends .............................. 649 --
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Net income - available to common stockholders ......... $ 6,822 $ 6,751
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Earnings per common share - basic:
Income before extraordinary item ................. $ 0.25 $ 0.26
Extraordinary item ............................... 0.00 0.00
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Net income - available to common stockholders ......... $ 0.25 $ 0.26
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Weighted average number of common shares
outstanding - basic .............................. 27,153,000 25,799,000
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Weighted average number of common shares
outstanding - basic, assuming full conversion of
operating units outstanding ...................... 39,241,000 37,904,000
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Earnings per common share - diluted:
Income before extraordinary item ................. $ 0.25 $ 0.26
Extraordinary item ............................... 0.00 0.00
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Net income - available to common stockholders .... $ 0.25 $ 0.26
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Weighted average number of common shares
outstanding - diluted for EPS .................... 39,907,000 38,325,000
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The accompanying notes are an integral part of these financial statements.
2
THE MACERICH COMPANY (The Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
January 1 to March 31,
-------------------------
1998 1997
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Cash flows from operating activities:
Net income - available to common stockholders ....................... $ 6,822 $ 6,751
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Adjustments to reconcile net income to net cash provided by operating
activities:
Extraordinary loss on early extinguishment of debt .................. 90 --
Depreciation and amortization ....................................... 11,712 9,474
Amortization of discount on trust deed note payable ................. 8 8
Minority interest in the net income of the Operating Partnership .... 3,008 3,168
Changes in assets and liabilities:
Tenant receivables, net ........................................ (130) 4,328
Other assets ................................................... 2,114 515
Accounts payable and accrued expenses .......................... 1,338 (2,900)
Other liabilities .............................................. 1,806 3,468
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Total adjustments ..................................... 19,946 18,061
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Net cash provided by operating activities ........................... 26,768 24,812
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Cash flows from investing activities:
Acquisitions of property and improvements ........................... (1,719) (56,750)
Renovations and expansions of centers ............................... (7,812) (551)
Additions to tenant improvements .................................... (917) (440)
Deferred charges .................................................... (4,643) (1,872)
Equity in income of unconsolidated joint ventures
and the management companies ................................... (1,428) (368)
Distributions from joint ventures ................................... 369 340
Contributions to joint ventures ..................................... (240,196) --
Loan repayments to affiliates, net .................................. (11,678) (1,081)
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Net cash used in investing activities ............................... (268,024) (60,722)
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Cash flows from financing activities:
Proceeds from mortgages and notes payable ........................... 133,000 47,000
Payments on mortgages and notes payable ............................. (56,085) (843)
Net proceeds from equity offerings .................................. 174,563 --
Dividends and distributions to partners ............................. (16,650) (16,262)
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Net cash provided by financing activities ........................... 234,828 29,895
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Net decrease in cash ................................................ (6,428) (6,015)
Cash and cash equivalents, beginning of period ........................... 25,154 15,643
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Cash and cash equivalents, end of period ................................. $ 18,726 $ 9,628
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Supplemental cash flow information:
Cash payment for interest, net of amounts capitalized ............... $ 16,957 $ 14,405
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Non-cash transactions:
Acquisition of property by assumption of debt ....................... $ 0 $ 46,202
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The accompanying notes are an integral part of these financial statements.
3
THE MACERICH COMPANY (The Company)
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
1. Interim Financial Statements and Basis of Presentation:
The accompanying consolidated financial statements of The Macerich
Company have been prepared in accordance with generally accepted
accounting principles ("GAAP") for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements and have not been audited by independent public
accountants.
The unaudited interim financial statements should be read in
conjunction with the audited financial statements and related notes
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) necessary for a fair
presentation of the financial statements for the interim periods have
been made. The results for interim periods are not necessarily
indicative of the results to be expected for a full year. The
accompanying consolidated balance sheet as of December 31, 1997 has
been derived from the audited financial statements, but does not
include all disclosure required by GAAP.
Certain reclassifications have been made in the 1997 financial
statements to conform to the 1998 financial statement presentation.
In March, 1998, the FASB, through its Emerging Issues Task Force
("EITF"), concluded based on EITF 97-11 that all internal costs to
source, analyze and close acquisitions should be expensed as incurred.
The Company has historically capitalized these costs. The Company has
adopted the FASB's interpretation effective March 19, 1998, and expects
the impact to be an approximate $.06 per share reduction of net income
per share in 1998.
Earnings Per Share ("EPS")
The computation of basic earnings per share is based on net income and
the weighted average number of common shares outstanding for the
periods ending March 31, 1998 and 1997. The diluted earnings per share
give effect to the outstanding restricted stock and common stock
options calculated using the treasury stock method. The convertible
debentures and convertible preferred stock would be antidilutive to the
calculation of diluted EPS and therefore are not included. The OP units
not held by the Company have been included in the diluted EPS
calculation. The following table reconciles the basic and diluted
earnings per share calculations:
For the quarters ended March 31,
----------------------------------------------------------------
1998 1997
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Net Net
Income Shares Per Share Income Shares Per Share
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(In thousands, except per share data)
Net income................................................ $7,471 $6,751
Less: Preferred stock dividends.......................... 649 -
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Basic EPS:
Net income - available to common stockholders............. 6,822 27,153 $0.25 6,751 25,799 $0.26
Diluted EPS:
Effect of dilutive securities:
Conversion of OP units................................. 3,008 12,088 0.25 3,168 12,105 0.26
Employee stock options and restricted stock............ 177 666 0.27 41 421 0.10
Convertible preferred stock............................ n/a - antidilutive for EPS - - -
Convertible debentures................................. n/a - antidilutive - - -
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Net income - available to common stockholders............. $10,007 39,907 $0.25 $9,960 38,325 $0.26
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4
THE MACERICH COMPANY (The Company)
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
2. Organization:
The Macerich Company (the "Company") was incorporated under the General
Corporation Law of Maryland on September 9, 1993 and commenced
operations effective with the completion of its initial public offering
("IPO") on March 16, 1994. The Company was formed to continue the
business of the Macerich Group, which since 1972 has focused on the
acquisition, ownership, redevelopment, management and leasing of
regional shopping centers located throughout the United States. In
1994, the Company became the sole general partner of The Macerich
Partnership L.P., (the "Operating Partnership"). The Operating
Partnership owns or has an ownership interest in thirty-eight regional
shopping centers and four community shopping centers, including a
portfolio of twelve regional malls that was acquired on February 27,
1998. Collectively these properties and interests are referred to as
the "Centers". The Company conducts all of its operations through the
Operating Partnership and other wholly owned subsidiaries, and the
Company's three Management Companies, Macerich Property Management
Company, Macerich Management Company, and Macerich Manhattan Management
Company, collectively referred to as "the Management Companies".
The Company is a real estate investment trust under the Internal
Revenue Code of 1986, as amended, owns approximately 69% of The
Operating Partnership as of March 31, 1998. The limited partnership
interest not owned by the Company is reflected in these financial
statements as Minority Interest.
3. Investments in Unconsolidated Joint Ventures and the Management
Companies:
The following are the Company's investments in various real estate
joint ventures which own regional retail shopping centers. The
Operating Partnership's interest in each joint venture as of March 31,
1998 is as follows:
The Operating Partnership's
Joint Venture Ownership %
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Macerich Northwestern Associates........... 50%
Panorama City Associates................... 50%
SDG Macerich Properties, L.P. ............. 50%
West Acres Development..................... 19%
Manhattan Village, LLC..................... 10%
The Operating Partnership also owns the non-voting preferred stock of
the Macerich Management Company and Macerich Property Management
Company and is entitled to receive 95% of the distributable cash flow
of these two entities. Macerich Manhattan Management Company is a 100%
subsidiary of Macerich Management Company. The Company accounts for the
Management Companies and joint ventures using the equity method of
accounting.
On February 27, 1998, the Company, through a 50/50 joint venture, SDG
Macerich Properties, L.P., acquired a portfolio of twelve regional
malls. The total purchase price was $974,500 including the assumption
of $485,000 in debt. The Company funded its 50% of the remaining
purchase price by issuing 3,627,131 shares of convertible preferred
stock for proceeds totaling $100,000 in a private placement. The
Company also issued 2,879,134 shares of common stock ($79,600 of total
proceeds) from the Company's shelf registration. The balance of the
purchase price was funded from the Company's line of credit. Each of
the joint venture partners will assume leasing and management
responsibilities for six of the regional malls. The results of this
joint venture are included for the period subsequent to the
acquisition.
In December 1997, North Valley Plaza, which was 50% owned by the
Company, was sold.
5
THE MACERICH COMPANY (The Company)
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
3. Investments in Unconsolidated Joint Ventures and the Management
Companies - Continued:
Combined and condensed balance sheets and statements of operations are
presented below for all unconsolidated joint ventures, and the
Management Companies, followed by information regarding the Operating
Partnership's beneficial interest in the combined operations.
Beneficial interest is calculated based on the Operating Partnership's
ownership interests in the joint ventures and the Management Companies.
COMBINED AND CONDENSED BALANCE SHEETS OF JOINT VENTURES
AND THE MANAGEMENT COMPANIES
----------------------------
March 31, December 31,
1998 1997
---- ----
Assets:
Properties, net............................... $1,129,187 $153,856
Other assets.................................. 29,541 10,013
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Total assets.................................. $1,158,728 $163,869
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Liabilities and partners' capital:
Mortgage notes payable........................ $566,001 $84,342
Other liabilities............................. 36,369 6,563
The Company's capital......................... 249,224 7,969
Outside partners' capital..................... 307,134 64,995
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Total liabilities and partners' capital....... $1,158,728 $163,869
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6
THE MACERICH COMPANY (The Company)
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
3. Investments in Unconsolidated Joint Ventures and the Management
Companies - Continued:
COMBINED AND CONDENSED STATEMENTS OF OPERATIONS OF JOINT VENTURES
AND THE MANAGEMENT COMPANIES
----------------------------
From January 1, From January 1,
to to
March 31, 1998 March 31, 1997
--------------- --------------
Revenues:
Shopping center revenues..................... $19,436 $7,041
Management company revenue................... 1,324 827
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Total revenues............................... 20,760 7,868
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Expenses:
Shopping center expenses..................... 6,141 2,604
Interest..................................... 4,234 1,562
Management company expense................... 1,668 1,022
Depreciation and amortization................ 2,953 1,120
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Total operating costs........................ 14,996 6,308
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Gain (loss) on sale or write-down of assets.... (389) 7
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Net income................................... $5,375 $1,567
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--------------- --------------
Significant accounting policies used by the unconsolidated joint
ventures and the Management Companies are similar to those used by the
Company.
Included in mortgage notes payable are amounts due to related parties
of $43,500 at March 31, 1998 and December 31, 1997. Interest expense
incurred on these borrowings amounted to $734 for the three months
ended March 31, 1998 and $733 for the three months ended March 31,
1997.
7
THE MACERICH COMPANY (The Company)
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
3. Investments in Unconsolidated Joint Ventures and the Management
Companies - Continued:
The following table sets forth the Operating Partnership's
beneficial interest in the joint ventures:
PRO RATA SHARE OF COMBINED AND CONDENSED STATEMENTS OF
OPERATIONS OF JOINT VENTURES AND THE MANAGEMENT COMPANIES
---------------------------------------------------------
From January 1, From January 1,
to to
March 31, 1998 March 31, 1997
--------------- --------------
Revenues:
Shopping center revenues.................... $7,764 $2,624
Management company revenue.................. 1,257 785
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Total revenues.............................. 9,021 3,409
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Expenses:
Shopping center expenses.................... 2,446 1,011
Interest.................................... 1,823 508
Management company expense.................. 1,585 971
Depreciation and amortization............... 1,370 552
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Total operating costs....................... 7,224 3,042
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Gain (loss) on sale or write-down of assets... (369) 1
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Net income.................................. $1,428 $368
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4. Property:
Property is comprised of the following at:
March 31, December 31,
1998 1997
---- ----
Land.......................................... $313,052 $313,050
Building Improvements......................... 1,236,617 1,235,459
Tenant Improvements........................... 39,231 38,097
Equipment & Furnishings....................... 7,962 7,576
Construction in Progress...................... 21,016 13,247
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1,617,878 1,607,429
Less, accumulated depreciation................ (210,192) (200,250)
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$1,407,686 $1,407,179
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8
THE MACERICH COMPANY (The Company)
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
5. Deferred Charges and Other Assets:
Deferred charges and other assets, including deferred leasing and
financing costs are:
March 31, December 31,
1998 1997
---- ----
Leasing....................................... $28,213 $28,101
Financing..................................... 16,731 14,396
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44,944 42,497
Less, accumulated amortization................ (17,792) (18,127)
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27,152 24,370
Other assets.................................. 11,415 13,529
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$38,567 $37,899
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9
THE MACERICH COMPANY (The Company)
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
6. Mortgage Notes Payable:
Mortgage notes payable at March 31, 1998 and December 31, 1997 consist
of the following:
Carrying Amount of Notes
------------------------
1998 1997
---- ----
Property Pledged Related Related Interest Payment Maturity
As Collateral Other Party Other Party Rate Terms Date
- ------------------- ----- ----- ----- ----- ---- ----- ----
Capitola Mall..................... -- $37,583 -- $37,675 9.25% 316(d) 2001
Chesterfield Towne Center......... $65,552 -- $65,708 -- 9.10% 548(e) 2024
Chesterfield Towne Center......... 3,337 -- 3,359 -- 8.54% 28(d) 1999
Citadel........................... 75,419 -- 75,600 -- 7.20% 544(d) 2008
Crossroads Mall (a)............... -- 35,543 -- 35,638 7.08% 244(d) 2010
Fresno Fashion Fair............... 38,000 -- 38,000 -- 8.40% interest only 2001
Greeley Mall...................... 17,631 -- 17,815 -- 8.50% 187(d) 2003
Green Tree Mall/Crossroads - OK/
Centre at Salisbury (b)...... 117,714 -- 117,714 -- 7.23% interest only 2004
Holiday Village Mall.............. -- 17,000 -- 17,000 6.75% interest only 2001
Lakewood Mall (c)................. 127,000 -- 127,000 -- 7.20% interest only 2005
Northgate Mall.................... -- 25,000 -- 25,000 6.75% interest only 2001
Parklane Mall..................... -- 20,000 -- 20,000 6.75% interest only 2001
Queens Center..................... 65,100 -- 65,100 -- (f) interest only 1999
Rimrock Mall...................... 31,391 -- 31,517 -- 7.70% 244(d) 2003
South Towne Center................ 65,000 -- 65,000 -- 6.62% (g) interest only 2008
Valley View Center................ 51,000 -- 51,000 -- 7.89% (h) interest only 2006
Villa Marina Marketplace.......... 58,000 -- 58,000 -- 7.23% interest only 2006
Vintage Faire Mall (i)............ 55,212 -- 55,433 -- 7.65% 427(d) 2003
-------- -------- -------- --------
Total........................ $770,356 $135,126 $771,246 $135,313
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average interest rate at March 31, 1998 7.43%
------
------
Weighted average interest rate at December 31, 1997 7.42%
------
------
Notes:
(a) This note was issued at a discount. The discount is being
amortized over the life of the loan using the effective
interest method. At March 31, 1998 and December 31, 1997, the
unamortized discount was $421 and $430, respectively.
(b) This loan is cross collateralized by Green Tree Mall,
Crossroads Mall, Oklahoma and The Centre at Salisbury.
(c) On August 15, 1995, the Company issued $127,000 of
collateralized floating rate notes (the "Notes"). The Notes
bear interest at an average fixed rate of 7.20% and mature in
July 2005.
10
THE MACERICH COMPANY (The Company)
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
6. Mortgage Notes Payable, Continued:
The Notes require the Company to deposit all cash flow from
the property operations with a trustee to meet its obligations
under the Notes. Cash in excess of the required amount, as
defined, is released. Included in cash and cash equivalents is
$750 of restricted cash deposited with the trustee at March
31, 1998 and at December 31, 1997.
(d) This represents the monthly payment of principal and interest.
(e) This amount represents the monthly payment of principal and
interest. In addition, contingent interest, as defined in the
loan agreement, may be due to the extent of 35% of the amount
by which the property's gross receipts (as defined in the loan
agreement) exceed a base amount specified therein. Contingent
interest expense recognized by the Company was $0 for the
period ended March 31, 1998 and $74 for the three months ended
March 31, 1997.
(f) This loan bears interest at LIBOR plus 0.45%. There is an
interest rate protection agreement in place on the first
$10,200 of this debt with a LIBOR ceiling of 5.88% through
maturity with the remaining principal having an interest rate
cap with a LIBOR ceiling at 7.07% through 1997 and 7.7%
thereafter.
(g) At December 31, 1997, this loan had an interest rate of LIBOR
plus 1% which totaled 6.9%. In February 1998, this loan was
converted into a fixed rate loan bearing interest at 6.622%
maturing in 2008.
(h) As of March 31, 1997, this loan had an interest rate of LIBOR
plus 1.50%; however, on April 16, 1997, the Company converted
this loan into a fixed rate 10 year loan bearing interest at
7.89% and maturing in October 2006.
(i) Included in cash and cash equivalents is $3,031 and $3,030 at
March 31, 1998 and December 31, 1997, respectively, of cash
restricted under the terms of this loan agreement.
Certain mortgage loan agreements contain a prepayment penalty provision
for the early extinguishment of the debt.
Total interest expense capitalized for the three months ending
March 31, 1998 and 1997 was $661 and $94, respectively.
The market value of notes payable at March 31, 1998 and December 31,
1997 is estimated to be approximately $1,087,000 and $1,013,000,
respectively, based on current interest rates for comparable loans.
7. Bank Notes Payable:
At December 31, 1997, the Company had $55,000 outstanding under its
$60,000 unsecured credit facility, which bore interest at LIBOR plus
1.325%. On February 26, 1998, the Company increased this credit
facility to $150,000 with a maturity of February 2000, currently
bearing interest at LIBOR plus 1.35%. As of March 31, 1998, $133,000
was outstanding on this line of credit.
11
THE MACERICH COMPANY (The Company)
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
8. Convertible Debentures:
On June 27, 1997, the Company issued and sold $150,000 of convertible
subordinated debentures (the "Debentures") due 2002. An additional
$11,400 of Debentures were sold in July 1997. The Debentures, which
were sold at par, bear interest at 7.25% annually (payable
semi-annually) and are convertible at any time, on or after 60 days,
from the date of issue at a conversion price of $31.125 per share. The
Debentures mature on December 15, 2002 and are callable by the Company
after June 15, 2002 at par plus accrued interest.
9. Related-Party Transactions:
The Company engaged The Management Companies to manage the operations
of its properties and certain unconsolidated joint ventures. For the
periods ending March 31, 1998 and 1997, management fees of $628 and
$507, respectively, were paid to the Management Companies by the
Company.
Certain mortgage notes were held by outside partners of the individual
Macerich Group partnerships. Interest expense in connection with these
notes was $2,527 and $2,490 for the three months ended March 31, 1998
and 1997, respectively. Included in accrued interest expense is
interest payable to these partners of $517 and $516 at March 31, 1998
and December 31, 1997, respectively.
10. Commitments and Contingencies:
Certain partnerships have entered into noncancellable operating ground
leases. The leases expire at various times through 2070, subject in
some cases to options to extend the terms of the lease. Certain leases
provide for contingent rent payments based on a percent of base rent
income, as defined. Ground rent expenses were $218 for the three months
ended March 31, 1998 and $171 for the three months ended March 31,
1997. There were no contingent rents in either period.
Perchloroethylene (PCE) has been detected in soil and groundwater in
the vicinity of a dry cleaning establishment at North Valley Plaza,
which was sold on December 18, 1997. The California Department of Toxic
Substance Control (DTSC) advised the Company in 1995 that very low
levels of Dichlorethylene (1,2,DCE), a degradation byproduct of PCE,
have been detected in a water well located 1/4 mile west from the dry
cleaners, and that the dry cleaning facility may have contributed to
the introduction of 1,2 DCE into the water well. According to DTSC, the
maximum contaminant level (MCL) for 1,2DCE which is permitted in
drinking water is 6 parts per billion (ppb). The 1,2DCE which was
detected in the water well at 1.2 ppb, is below the MCL. The Company
has retained an environmental consultant and has initiated extensive
testing of the site. Remediation began in October 1997. The joint
venture that owned the property agreed (between itself and the buyer)
that it would be responsible for continuing to pursue the investigation
and remediation of impacted soil and groundwater resulting from
releases of PCE from the shopping center's former dry cleaner. $39 and
$4 has already been incurred by the Company for remediation, and
professional and legal fees for the periods ending March 31, 1998
and 1997, respectively. An additional $522 and $561 is accrued as a
liability by the Company as of March 31, 1998 and December 31, 1997,
respectively. The Company has initiated cost recovery actions and
intends to continue to look to responsible parties for recovery.
Toluene, a petroleum constituent, was detected in one of three
groundwater dewatering system holding tanks at Queens Center. Although
the source of toluene has not been fully defined, the Company
12
THE MACERICH COMPANY (The Company)
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
10. Commitments and Contingencies, Continued:
suspects the source to be either an adjacent automotive service station
and/or a previous automotive service station, which operated on site
prior to development of the mall. Toluene was detected at levels of 410
and 160 parts per billion (ppb) in samples taken from the tank in
October 1995 and February 1996, respectively. Additional samples were
taken in May and December of 1996, with results of .63 ppb and
"non-detect" for the May sampling event and 16.2 ppb and 25.2 ppb for
the December sampling event. The MCL for toluene in drinking water is
1000 ppb. Although the Company believes that no remediation will be
required, it set up a $150 reserve in 1996 to cover professional fees
and testing costs, which was reduced by costs incurred of $0 for the
period ending March 31, 1998 and $3 for the period ending March 31,
1997. The Company intends to look to the responsible parties and
insurers if remediation is required.
The Company acquired Fresno Fashion Fair in December 1996. Asbestos has
been detected in structural fireproofing throughout much of the Mall.
Testing data conducted by professional environmental consulting firms
indicates that the fireproofing is largely inaccessible to building
occupants and is well adhered to the structural members. Additionally,
airborne concentrations of asbestos were well within OSHA's permissible
exposure limit (PEL) of .1 fcc. The accounting for this acquisition
includes a reserve of $3.3 million to cover future removal of this
asbestos, as necessary. The Company incurred $0 and $0 for the periods
ending March 31, 1998 and 1997, respectively.
Dry cleaning chemicals including PCE were detected in soil and
groundwater in the vicinity of a former dry cleaning establishment at
Huntington Center. The release has been reported to the local
government authorities. The Company estimates, based on the data
currently available, that costs for assessment, remediation and legal
services will not exceed $500. Consequently, a $500 reserve was
established at the time of the acquisition to cover professional and
legal fees. The Company intends to look to responsible parties and
insurers for cost recovery.
11. Pro Forma Information:
On February 27, 1998, the Company through a 50/50 joint venture, SDG
Macerich Properties, L.P., acquired a portfolio of twelve regional
malls. On a pro forma basis, reflecting this acquisition as if it had
occurred on January 1, 1998 and 1997, the Company would have reflected
net income - available to common stockholders of $7,072 and $7,269
for the periods ending March 31, 1998 and 1997, respectively. Net
income - available to common shareholders on a basic and diluted per
share basis would be $0.25 and $0.25, for the periods ended March 31,
1998 and 1997, respectively.
12. Preferred Stock:
The Company issued 3,627,131 shares of convertible preferred stock for
proceeds totaling $100,000 in a private placement. The preferred stock
can be converted on a one for one basis into common stock and will pay
a dividend equal to the greater of $0.46 per share per quarter or the
dividend than payable on a share of common stock.
13. Subsequent Event:
On May 5, 1998, a dividend\distribution of $0.46 per share was declared
for common shareholders and OP unit holders of record on May 21, 1998.
The dividend\distribution is payable on June 4, 1998. Also, a dividend
of $0.179 per share of series A convertible preferred stock was
declared and is payable on June 4, 1998.
On April 24, 1998, the Company issued 808,989 of common shares and on
April 28, 1998, an additional 967,255 of common shares were issued.
The total proceeds of these transactions were approximately $46,600,
leaving approximately $371,300 available on the shelf registration
which was for an initial total of $500,000 of common stock or common
stock warrants. The proceeds from these transactions were used to
pay down the Company's line of credit.
13
THE MACERICH COMPANY (The Company)
Item II
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion is based primarily on the consolidated balance sheet of
the Macerich Company ("the Company") as of March 31, 1998, and also compares the
activities for the three months ended March 31, 1998 to the activities for the
three months ended March 31, 1997.
This information should be read in conjunction with the accompanying
consolidated financial statements and notes thereto. These financial statements
include all adjustments which are, in the opinion of management, necessary to
reflect the fair statement of the results for the interim periods presented, and
all such adjustments are of a normal recurring nature.
This Quarterly Report on Form 10-Q contains or incorporates statements that
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Those statements appear in a number
of places in this Quarterly Report on Form 10-Q and include statements
regarding, among other matters, the Company's growth opportunities, the
Company's acquisition strategy, regulatory matters pertaining to compliance
with governmental regulations and other factors affecting the Company's
financial condition or results of operations. Stockholders are cautioned that
any such forward looking statements are not guarantees of future performance
and involve risks, uncertainties and other factors which may cause actual
results, performance or achievements to differ materially from the future
results, performance or achievements, expressed or implied in such forward
looking statements.
The following reflects the Company's acquisitions in 1997 and 1998:
Date Acquired Location
------------- --------
"1997 Acquisition Centers":
South Towne Center..................... March 27, 1997 Sandy, Utah
Stonewood Mall......................... August 6, 1997 Downey, California
Manhattan Village Shopping Center...... August 19, 1997 Manhattan Beach, California
The Citadel............................ December 19, 1997 Colorado Springs, Colorado
Great Falls Marketplace................ December 31, 1997 Great Falls, Montana
"1998 Acquisition Centers":
ERE/Yarmouth Portfolio................. February 27, 1998 Eight states
The financial statements include the results of these centers for periods
subsequent to their acquisition.
Manhattan Village Shopping Center and the ERE/Yarmouth portfolio ("Joint Venture
Acquisitions") were acquired by unconsolidated joint ventures of the Company
which are reflected using the equity method of accounting. The results of these
acquisitions are reflected in the consolidated results of operations of the
Company in equity in income of unconsolidated joint ventures and the Management
Companies.
Many of the variations in the results of operations, discussed below, occurred
due to the addition of these properties to the portfolio during 1998 and 1997.
Many factors, such as the availability and cost of capital, overall debt to
market capitalization level, interest rates and availability of potential
acquisition targets that meet the Company's criteria, impact the Company's
ability to acquire additional properties. Accordingly, management is uncertain
as to whether during the balance of 1998, and in future years, there will be
similar acquisitions and corresponding increases in revenues, equity in income
of unconsolidated joint ventures and the management companies, net income and
funds from operations that occurred as a result of the addition of the 1998 and
1997 Acquisition Centers. All other centers are referred to herein as the "Same
Centers".
The bankruptcy and/or closure of retail stores, particularly Anchors, may reduce
customer traffic and cash flow generated by a Center. During 1997, Montgomery
Ward filed bankruptcy. The Company has 11 Montgomery Ward stores in its
portfolio. Montgomery Ward has not yet disclosed whether
14
THE MACERICH COMPANY (The Company)
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
they will cease operating any of their stores in the Company's centers. The
long-term closure of these or other stores could adversely affect the Company's
performance.
In addition, the Company's success in the highly competitive real estate
shopping center business depends upon many other factors, including general
economic conditions, the ability of tenants to make rent payments, increases or
decreases in operating expenses, occupancy levels, changes in demographics,
competition from other centers and forms of retailing and the ability to renew
leases or re-let space upon the expiration or termination of leases.
Results of Operations - Three Months Ended March 31, 1998 and 1997
Revenues
Minimum and percentage rents together increased by $8.3 million to $42.6 million
for the three months ended March 31, 1998 compared to $34.3 million in the three
months ended March 31, 1997. The 1997 Acquisition Centers contributed $7.3
million of the increase with approximately $1.0 million generated from the Same
Centers.
Tenant recoveries for the first quarter of 1998 increased by $2.7 million
compared to the first quarter of 1997. This was primarily due to the addition of
the 1997 Acquisition Centers.
Other revenue decreased by $.2 million primarily due to nonrecurring fee income
received in the first quarter of 1997.
Expenses
Shopping center expenses increased by $3.0 million for the three months ended
March 31, 1998 compared to the same period in 1997. Approximately $2.6 million
of the increase was due to the addition of the 1997 Acquisition Centers. The
Same Centers had a net increase of $0.4 million, primarily from an increase in
maintenance, repair, security and utility expenses.
General and administrative expenses increased to $1.0 million in 1998 compared
to $0.8 million in the same period in 1997, primarily due to increased executive
and director compensation expense.
Interest expense increased to $20.6 million at March 31, 1998 compared to $14.8
million at March 31, 1997. This increase of $5.8 million is partially
attributable to the acquisition activity in 1997 and 1998, which was partially
funded with secured debt and borrowings under the Company's line of credit. In
addition, in June and July of 1997, the Company issued $161.4 million of
convertible debentures which resulted in $2.9 million of the variance.
Depreciation and amortization increased to $11.7 million at March 31, 1998
compared to $9.5 million at March 31, 1997. This increase of $2.2 million
relates primarily to the 1997 Acquisition Centers.
15
THE MACERICH COMPANY (The Company)
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Income From Unconsolidated Joint Ventures and The Management Companies
The income from unconsolidated joint ventures and the Management Companies
increased to $1.4 million compared to $.4 million for the period ended March 31,
1997. This increase was primarily due to the Joint Venture Acquisitions.
Net Income
Net income for the period increased to $6.8 million compared to $6.7 million for
the three months ended March 31, 1997. This increase was due to the factors
discussed above.
Cash Flows From Operating Activities
As a result of the factors discussed above, cash flow from operations increased
to $26.8 million in the first quarter of 1998 from $24.8 million during the
first quarter of 1997. This increase is primarily due to increased net operating
income from the properties.
Cash Flows From Investing Activities
Net cash flow used in investing activities increased to $268.0 million in the
first quarter of 1998 from $60.7 million in the first quarter of 1997 due
primarily to more cash being used for acquisitions in the first quarter of 1998
compared to 1997.
Cash Flows From Financing Activities
Cash flow from financing activities increased to $234.8 million in the first
quarter of 1998 from $29.9 million for the first quarter of 1997 as a result of
net proceeds received from issuing stock and debt in 1998.
Liquidity and Capital Resources
The Company intends to meet its short term liquidity needs through cash
generated from operations and working capital reserves. The Company anticipates
that revenues will continue to provide necessary funds for its operating
expenses and debt service requirements, and to pay dividends to stockholders in
accordance with REIT requirements. The Company anticipates that cash generated
from operations, together with cash on hand, will be adequate to fund capital
expenditures which will not be reimbursed by tenants, other than non-recurring
capital expenditures. Capital for major expenditures or redevelopments has been,
and is expected to continue to be, obtained from equity or debt financings.
The Company believes that it will have access to the capital necessary to expand
its business in accordance with its strategies for growth and maximizing Funds
from Operations. The Company presently intends to obtain additional capital
necessary to expand its business through a combination of additional equity
offerings and debt financings.
16
THE MACERICH COMPANY (The Company)
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
The Company's total outstanding loan indebtedness at March 31, 1998 was $1,471.3
billion (including its pro rata share of joint venture debt). This equated to a
debt to Total Market Capitalization (defined as total debt of the Operating
Partnership, including its pro rata share of joint venture debt, plus aggregate
market value of outstanding shares of common and preferred stock, assuming full
conversion of OP Units into stock) rate of 52.5% at March 31, 1998. The
Company's debt consists primarily of fixed rate, conventional mortgages payable
secured by individual properties. In connection with $65.1 million of the
Company's floating rate indebtedness, the Company has entered into interest rate
protection agreements that limit the Company's exposure to increases in interest
rates.
The Company has filed a shelf registration statement, effective December 8,
1997, to sell securities. The shelf registration was for a total of $500 million
of common stock or common stock warrants. On February 18, 1998, the Company
issued 1,826,484 shares and on February 12, 1998, an additional 1,052,650 shares
were issued. On April 24, 1998, the Company issued 808,989 shares and an
additional 967,255 shares were issued on April 28, 1998. The total proceeds of
these transactions were approximately $128.7 million, leaving approximately
$371.3 million available on the shelf registration.
The Company has an unsecured line of credit which has been recently expanded up
to $150 million. There was $55 million outstanding at December 31, 1997 and $133
million outstanding on March 31, 1998.
At March 31, 1998 and December 31, 1997, the Company had cash and cash
equivalents of $18.7 million and $25.2 million, respectively.
Year 2000 Compliance
The Company has been advised by its independent software vendor that it has
completed its evaluation, testing and modification of the property management
and accounting software used by the Company and the necessary changes have been
completed to achieve year 2000 compliance. The Company does not believe it will
have any significant accounting or property management impact as a result of the
year 2000.
Funds From Operations
The Company believes that the most significant measure of its performance is
Funds from Operations ("FFO"). FFO is defined by the National Association of
Real Estate Investment Trusts ("NAREIT") to be: Net income (computed in
accordance with GAAP), excluding gains or losses from debt restructuring and
sales or write down of assets, plus depreciation and amortization (excluding
depreciation on personal property and amortization of loan and financial
instrument costs) and after adjustments for unconsolidated entities. Adjustments
for unconsolidated entities will be calculated on the same basis. FFO does not
represent cash flow from operations, as defined by generally accepted accounting
principles, and is not necessarily indicative of cash available to fund all cash
flow needs. The following reconciles net income - available to common
stockholders to FFO:
17
THE MACERICH COMPANY (The Company)
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
1998 1997
----------------------- -----------------------
Shares Amount Shares Amount
---------- ---------- ---------- ----------
(amounts in thousands)
Net income - available to common stockholders $ 6,822 $ 6,751
Adjustments to reconcile net income to FFO
Minority interest............................................. 3,008 3,168
Depreciation and amortization on wholly owned properties...... 11,712 9,474
Pro rata share of unconsolidated entities' depreciation and
amortization............................................. 1,370 553
Extraordinary loss on early extinguishment of debt............ 90 -
Pro rata share of (gain) loss on sale or write-down
from unconsolidated entities............................. 369 (1)
Amortization of loan costs, including interest rate caps...... (787) (365)
Depreciation of personal property............................. (172) (109)
---------- ----------
FFO - basic (1) 39,241 22,412 37,904 19,471
To arrive at FFO - diluted:
Impact of convertible preferred stock......................... 1,411 649 - -
Impact of stock options and restricted stock using
the Treasury method....................................... 666 256 421 60
Impact of convertible debentures.............................. (N/A - anti-dilutive) - -
---------- ---------- ---------- ----------
FFO - diluted (2) 41,318 $23,317 38,325 $19,531
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
1) Calculated based upon basic net income as adjusted to reach basic FFO.
Weighted average number of shares includes the weighted average shares
of common stock outstanding for 1998 and 1997 assuming the conversion
of OP units.
2) The computation of FFO - diluted and diluted average number of shares
outstanding includes the effect of common stock options outstanding
and restricted stock using the treasury method. Convertible debentures
are antidilutive and are not included. On February 25, 1998, the
Company sold $100 million of convertible preferred stock. The preferred
stock can be converted on a 1 for 1 basis for common stock. These
preferred shares are not assumed converted for purposes of net income
per share as it would be antidilutive to that calculation. The
preferred shares are assumed converted for purposes of FFO per share as
they are dilutive to that calculation.
Included in minimum rents were rents attributable to the accounting practice of
straight-lining of rents. The amount of straight-lining of rents that impacted
minimum rents was $874 for the three months ended March 31, 1998 and $753 for
the three months ended March 31, 1997.
18
THE MACERICH COMPANY (The Company)
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Inflation
In the last three years, inflation has not had a significant impact on the
Company because of a relatively low inflation rate. Most of the leases at the
Centers have rent adjustments periodically through the lease term. These rent
increases are either in fixed increments or based on increases in the Consumer
Price Index. In addition, many of the leases are for terms of less than ten
years, which enables the Company to replace existing leases with new leases at
higher base rents if the rents of the existing leases are below the then
existing market rate. Additionally, most of the leases require the tenants to
pay their pro rata share of operating expenses. This reduces the Company's
exposure to increases in costs and operating expenses resulting from inflation.
New Accounting Pronouncements
In March, 1998, the FASB, through its Emerging Issues Task Force ("EITF"),
concluded based on EITF 97-11 that all internal costs to source, analyze and
close acquisitions should be expensed as incurred. The Company has historically
capitalized these costs. The Company has adopted the FASB's interpretation
effective March 19, 1998, and expects the impact to be an approximate $.06 per
share reduction of net income - diluted and FFO - diluted per share in 1998.
19
THE MACERICH COMPANY (The Company)
PART II
Other Information
Item 1 Legal Proceedings
None
Item 2 Changes in Securities
None
Item 3 Defaults Upon Senior Securities
None
Item 4 Submission of Matters to a Vote of Security Holders
None
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
A report on Form 8-K dated April 7, 1998, event date February 25,
1998, was filed with the Securities and Exchange Commission for
the purpose of disclosing the issuance of $100 million of the
Company's Series A Cumulative Convertible Redeemable Preferred
Stock.
A report on Form 8-K/A dated April 22, 1998, event date February
27, 1998, was filed with the Securities and Exchange Commission
for the purpose of disclosing the acquisition of twelve regional
malls by SDG Macerich Properties, L.P. from the Equitable
Assurance Society of the United States.
20
THE MACERICH COMPANY (The Company)
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Macerich Company
By: /s/ Thomas E. O'Hern
--------------------
Thomas E. O'Hern
Senior Vice President and
Chief Financial Officer
Date: May 15, 1998
21
5
1,000
3-MOS
DEC-31-1998
JAN-01-1998
MAR-31-1998
18,726
0
23,826
0
0
0
1,617,878
(210,192)
1,738,029
18,999
1,199,882
0
100,000
288
252,671
1,738,029
0
61,175
0
19,746
11,712
0
20,576
6,912
0
6,912
0
(90)
0
6,822
0.25
0.25
